IKEA’s outgoing CEO sees red tape blocking growth

AnnaMolin

MALMO, Sweden (MarketWatch) — IKEA is poised to embark on a global spending spree, but its departing chief executive says red tape is hampering how freely the home-furnishings retailer can put its money to work.

IKEA

Rattan pendant lamp.

CEO Mikael Ohlsson said the amount of time it takes to open a store has roughly doubled in recent years. “What some years ago took two to three years now takes four to six years. And we also see that there’s a lot of hidden obstacles in different markets and also within the [European Union] that’s holding us back,” he said in an interview recently at an IKEA store on Sweden’s western coast.

IKEA, known for sleek design, low prices and flat-pack furniture, is planning to grow rapidly on several continents through 2020, spending up to 15 billion ($20 billion) starting next year.

During four years at IKEA’s helm, Ohlsson has steered the Swedish furniture retailer through economic turbulence that has crippled rivals.

He is set to retire in September and hand over the baton to Peter Agnefjall, a 41-year-old who has been managing IKEA’s Swedish operations.

Ohlsson, 55, plans to dive into photography when he retires and hopes to sit on the boards of some corporations and nonprofit organizations, he said — but, before he leaves, he needs to help the company figure out how to better navigate bureaucratic hurdles.

“We are planning to increase the establishment speed, but we see that the process to go through all the administrative procedures is taking longer and longer,” he said. “We need to learn how to deal with it by having more projects on the go. But I also think there’s room for improvement from the authorities’ side, as well.”

IKEA plans to nearly double its store count by the end of the decade to 500 outlets. Founded in 1943 by a teenage entrepreneur, IKEA now has a presence in 40 countries and nearly 18 billion in cash and securities.

Ohlsson said declining costs for raw materials such as cotton and wood likely would allow the company to cut prices 1% this fiscal year. “We always want to continue to lower the price, especially in times like these,” when consumers are cautious and hunting for bargains amid economic uncertainty, he said. “I think the global economy will remain challenging for a long time, for many years.”

Ohlsson’s plan to grow on the back of emerging markets was successful, with increased sales coming mainly from China, Russia and Poland in fiscal 2012. The U.S. and Germany also were strong contributors.

IKEA plans to invest €2 billion in stores, factories and renewable energy this year. But the company fell €1 billion short of its goal of investing €3 billion in new projects last year, largely because of bureaucratic obstacles, he said. For 10 years, IKEA has tried unsuccessfully to relocate a store in France, for example. The company also is challenging German policy dictating what can be sold and where, saying the rules are out of sync with EU legislation.

“It’s a pity, because it can help create jobs and investments at a time when unemployment is high in many countries,” Ohlsson said. A new IKEA store creates construction and store jobs for about 1,000 workers, he said.

IKEA aims to increase revenue at least 60% to between €45 billion and €50 billion by 2020. It says it has sufficient reserves to fund the expansion even as other companies are holding back on investment because of global economic weakness.

The company’s highest-profile headaches have come in India, an untapped market where IKEA wants to open a first store in at least five years and roll out an additional three soon thereafter. In the next 20 years, IKEA plans to spend €1.5 billion to reach 25 stores in the country.

The Indian government’s decision last year to allow some retailers to own 100% of their operations in the country appeared to pave the way for IKEA’s plans. But the company has encountered months of negotiation on whether it should be allowed to operate cafes and restaurants and sell products, such as textiles, toys, books, secondhand furniture and consumer electronics, that don’t carry the IKEA brand.

IKEA nevertheless is studying how to triple its purchasing from India to about €1 billion in coming years, including buying materials to export.

“We’d like to be part of transforming and modifying the industry in India,” Ohlsson said. An investment by IKEA could help modernize India’s largely unorganized $500 billion retail sector and boost interest from other foreign investors.

IKEA, unlike many of its competitors, owns the land and buildings where it operates.

The company also aims to increase its ability to produce products in house. That ambition could gain steam this year, when IKEA expects to open a furniture factory near Shanghai, the company’s second in China. In addition, production will start this year at a newly acquired particle-board plant in Novgorod, Russia.

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